Through the development of protocols such as AMMs and money markets, DeFi has become sustainably more liquid. However, it is often inept to a user’s capital. Static or single-utility liquidity pools dominate networks causing liquidity fragmentation and excessive opportunity costs for users. Users are forced to manually delegate liquidity between protocols which can make efficiently earning yield or allocating liquidity very difficult.
The Backd protocol’s reactive liquidity adds layers of utility to users’ assets while simultaneously aggregating yield. Specifically, users can register Actions to their liquidity which autonomously delegate their assets to where they are most efficient (Backd pools or external protocols). In this post we’ll be focusing on Backd liquidity pools and providing an overview of how they aggregate or compound yield for liquidity providers.
Backd utilizes single-asset liquidity pools into which any user can deposit a pool’s underlying asset. Each supported asset bears its own volatility and liquidity profile. Therefore, pools operate in isolation from one another and are parametrized for capital efficiency per the asset’s risk profile. Each pool consists of a required reserve ratio which can be changed, along with other parameters, via the Backd DAO. This is the ratio between assets deployed to a yield farming strategy and assets that remain idle in the pool.
- Low reserve ratio = higher yield and higher top up insolvency risk
- High reserve ratio = lower yield and lower top up insolvency risk.
Each single-asset pool has a pool-specific vault. A vault is a smart contract that controls all deposits, withdrawals, and interactions with a yield-farming strategy. Backd v1 vaults employ a single strategy and maintain a required target allocation factor. The target allocation factor is the ratio of vault assets that are allocated to a strategy. The remaining allocation of vault assets stay idle within the vault to reduce gas costs on withdrawal. Furthermore, vault target allocation factors have a deviation bound. This is the percentage by which the target allocation factor may deviate.
In addition to yield aggregated from the strategy, vaults also accrue a percent of fees generated by the protocol. When an Action (such as a collateral top-up) occurs, the registered user pays a fee in LP tokens. The fee is then distributed to users who stake their Backd governance tokens, liquidity providers, and Backd keepers. Liquidity providers receive protocol fees in the form of LP tokens which, in essence, automatically increases the user’s provided liquidity (compounds yield).
A strategy contains the logic for yield-farming using the funds which it is being allocated from the vault. The performance of a strategy is tracked by the depositing vault and allocations are rebalanced according to the vault parameters (e.g. debt limits). Profits can be harvest and any unrealized profits are compounded by the strategy. The protocol charges a performance fee on strategy profits. Part of this fee is paid to a strategy’s strategist in LP tokens. The remainder of the performance fee is directed to the protocol’s treasury, which is essentially controlled by governance.
Backd Governance Token Rewards🎁
After a user makes a deposit into a Backd liquidity pool their assets will immediately begin aggregating yield. There are no further steps required for users to earn yield from Backd strategies and protocol fees.
In order to also earn Backd governance token rewards, users must stake or register their Backd LP tokens. Registered LP tokens are already staked. In exchange for staked LP tokens, users are rewarded Backd governance tokens on a per-block basis. Users can withdraw their LP tokens and claim their share of accrued governance tokens at any time.
In addition to Backd LP staking, the Backd protocol also offers Backd governance token staking. A percent of all protocol fees are distributed to staked Backd governance tokens. Staked tokens along with their accrued rewards can be withdrawn at anytime.
It is important that the Backd governance token has ample liquidity. In order to facilitate this, users who provide liquidity for the Backd governance token will be distributed Backd governance token rewards. In order to receive rewards, users must stake whitelisted AMM LP tokens on the Backd protocol. Staked LP tokens can be withdrawn at anytime along with their accrued Backd governance token rewards.